SaaS Finance | How To Get SaaS Funding & How It Works
Software as a Service (SaaS) companies have boomed in the last decade, leading to a host of new SaaS finance products that suit their unique needs.
Because ultimately, getting the right funding for your business has a lot to do with the nature of your business.
Finding lenders or investors that understand your business model can be difficult, especially if you are struggling to identify the finance structure or type that suits you best.
Don’t have the time to read our entire guide and just want the key points? We get it:
- SaaS businesses have a different financial model to many other traditional B2B or B2C businesses, and so can benefit from specialist SaaS finance.
- While capital investment is beneficial, often the loss of equity is too much to stomach for SaaS business owners.
- Specialist finance is available to provide non-dilutive capital investment into your SaaS company.
- Writing a comprehensive business plan with detailed financial forecasts is essential.
- Clifton Private Finance can help you get the specialist SaaS finance your company needs to grow.
Understanding the SaaS Finance Model
Traditional companies work in two main ways, typically falling into the categories of either business-to-business (B2B) or business-to-customer (B2C).
B2B businesses sell their product or service to other businesses, generating invoices for payment on either an ad-hoc or regular basis. These businesses are well understood by lenders and many products exist to serve their needs. Financial products such as invoice factoring exist to help bridge the gap between work being done and payment being made.
B2C companies deal directly with the consumer, typically making many smaller transactions that work on a volume basis. Credit and debit card transactions are one of the main avenues of income for B2C businesses, leading to options such as merchant cash advances to assist in balancing the seasonal nature of many of these enterprises.
Rather than generating large invoices, or relying on a multitude of smaller payments from customers, SaaS income comes from regular monthly subscription payments from their members.
With comprehensive data available, SaaS companies can reliably and accurately predict their future income. Unlike both traditional B2B and B2C businesses, the SaaS company rarely suffers from seasonal drops in income.
However, SaaS businesses can have significant startup costs as they research, develop, and market the products and services on offer. Additionally, maintaining the SaaS business and scaling it for growth can require injections of capital.
This is where SaaS finance products need to be tailored to SaaS companies specifically, and we'll get into that next.
Important Terms in SaaS Finance
The SaaS business model introduces some specific terms that must be understood. These include:
- MRR - Monthly Recurring Revenue - MRR represents the expected monthly income from member subscriptions. Thanks to up-to-date data, MRR tends to be a reliable figure that the SaaS business can use confidently for forecasting.
- ARR - Annual Recurring Revenue - An extension of MRR, ARR is the yearly subscription income. This is simply calculated as MRR * 12.
- MRR Growth - This is the net increase or decrease in MRR from one month to the next. Positive MRR Growth shows a stable SaaS business on the incline.
- ARPU - Average Revenue Per User - Different members will have different subscriptions, so it is not as simple to assume that each subscription has the same value. ARPU is the average calculated value of each member’s monthly worth.
- Churn Rate - It is inevitable that some members are lost over time. Churn rate is a percentage that dictates the loss of established members over time. Low Churn Rate is desirable.
- CAC - Customer Acquisition Cost - A more complex figure that represents the investment cost of obtaining a new member. Understanding CAC is essential to plan growth and secure necessary funding.
The Need for Funding in SaaS Companies
SaaS companies have a particular need for investment capital.
While there are certainly a number of SaaS-structured businesses that are able to “bootstrap” their way to success, using the personal investment of directors and careful financial management to grow over time until significant investment becomes easier to obtain, for many, success requires an initial burst of startup capital, typically followed by further injections when looking to make the most of growth opportunities.
Two problems immediately present themselves:
1. The Problem with Venture Capital and Angel Investment
Venture capital (VC) can seem to be a perfect way to raise the initial investment that is needed to get a SaaS company off the ground.
With a comprehensive business plan and well-structured forecast of income, it should seem relatively easy to get the interest of investors. In many cases, this is true.
However, the downside of external investment has always been the dilutive nature of the capital, meaning that the cost of investment is a significant portion of the business shares, often to a level where substantial control of the company is lost.
Entrepreneurs looking to maximise their return on their idea and skillset will find the demands of a venture capitalist a hard pill to swallow in many instances.
The same problem arises with angel investment.
Yes, the injection of funds that don’t need to be paid back on a regular basis can often seem like dreams answered, but again, there is a loss of shares and control, diluting the value of the company (and the initial concept of the service) for the original owners.
A different solution would seem to be the answer - in most cases, this would be a loan.
2. The Problem with Traditional Loans
Even assuming that your company has the acumen on paper to make an application for a startup loan or, once the business is running well, a fully-fledged business loan, secured or unsecured, it may not be the solution you seek.
The largest problem with such loans is the flat nature of their repayment model. A standard loan, as might be offered to a traditional B2B or B2C company, requires that repayments are made each month of the same size, with little flexibility.
SaaS businesses built on the membership/subscription model will take time to build their user base sufficiently to be able to make repayments of any significant size.
In fact, in many cases, for the first six months or more of a flat startup loan, many SaaS companies use the loan capital itself to make repayments, reducing the net value of the loan and stifling its true investment potential.
No - specialist funding needs to exist that is a better fit for the SaaS business model.
SaaS Finance - Specialist Funding for SaaS Companies
SaaS finance presents a non-dilutive capital investment with no limitation regarding its use that is repaid on a revenue basis, allowing the scaling of repayments to grow in line with the business growth. This is also known as revenue-based finance.
What does that mean?
It means that this type of specialist funding designed specifically for SaaS businesses isn’t considered a loan. It doesn’t affect your company credit rating, nor does it generate annual interest.
Importantly, repayments flow with your income and are taken as a percentage of your monthly revenue, ensuring that paying it back is never an unmanageable strain on finances.
The Cost of Revenue-Based Finance
Unlike a loan which comes with monthly or annual interest that can alter based on the Bank of England base rate, or a dilutive capital investment that brings a loss of equity (shares) in the company, revenue-based finance recoups its investment through a flat, pre-agreed repayment total.
This total is multiple of the initial investment and, depending on the type of business and risk assessment, may be between three and five times the initial capital provided.
In the long term, it is easy to see that the cost of specialist funding of this nature is not inconsiderable. However, the flexible nature of the repayments make this cost a lot easier to bear compared to some of the alternatives below.
Alternatives to Specialist SaaS Funding
Of course, specialist funding of this nature is not the only route available to a SaaS company.
Both traditional B2B or B2C routes can provide avenues to success, as well as less traditional business finance. Some of the other options include:
Venture Capital and Angel Investment
Though the loss in equity in your company can be off-putting, it doesn’t necessarily make external investment of this type wrong for you.
Some of the benefits include:
- Investment that doesn’t need to be repaid through revenue.
- Addition of business experts with a vested interest in the board as advisors.
- Expansion of business networks.
- An avenue for future growth funding as required.
With SaaS businesses, crowdfunding can be an extremely viable option. As the business model is based on member subscriptions, there is an easy path to offer discounted or unique subscription models for early adopters through crowdfunding.
Crowdfunding does require its own level of specialism and will require a dedicated marketing campaign for success, but remains a valuable alternative for SaaS entrepreneurs.
Whether startup loans at the beginning of the business, unsecured loans for later growth, or asset-based secure lending for large-scale expansion, the traditional bank or peer-to-peer loan can certainly play a part in SaaS company financing.
Depending on the type of loan, however, care should be taken to make sure the terms are right for your business model and that other alternatives aren’t simply more suitable.
There are many grants that are available to help if your company meets the stringent criteria - plus, they all have the significant advantage of never needing to be paid back.
Grants are not “free money”, however, with often a lengthy and complex application process, limited success, and specific usage limitations. That said, if your industry sector is one that lends itself to either government or private grants, it is an avenue worth pursuing.
At Clifton Private Finance, our specialists can work with you to understand the best funding option for your company, whether that's specialist SaaS finance, asset finance, a VAT loan, or any other type of business finance.
Book a free call below to see how we can help.
SaaS Finance Case Studies
Read some of our latest business and commercial finance case studies to get an understanding of how these finance tools work in real scenarios.
Obtaining Specialist SaaS Finance
As with all types of business finance, the onus is on your business to provide clear and comprehensive documentation that helps the lender understand your proposal and finances, allowing them to properly evaluate the associated risks and make a decision accordingly.
Therefore, to successfully apply for SaaS finance, this business plan and associated forecast are essential. Your business plan document is something that you should ensure is well-written, clearly presented, and - most importantly - up-to-date.
You may understand your SaaS business and be confident in your figures, but the lender will need to see the same potential as you.
When writing a SaaS business plan, it is essential that you cover the finances of the subscription model in full.
Is it only with an understanding of MRR (and the figures you use to reach that conclusion) that the lender can assess how reliable you will be in repaying the investment as well as the expected term length of the repayments.
Advice and Application
It is important that you take the right amount of time to select the SaaS funding product that properly suits your needs. Then, patiently ensure your application form is filled in accurately and completely.
Getting specialist funding for your SaaS business is can be a lengthy process - after all, you want to get it right - so be sure to schedule in the appropriate time to dedicate to the process. Being careful and thorough is key to a successful application.
We will also help with the application process, taking away many of the complexities of finance application and giving you the best possible chance of acceptance.
Speak to one of our team today for clear and comprehensive advice.
SaaS Funding FAQ
Q: What makes funding a SaaS business different to traditional B2B and B2C companies?
The financial model of an SaaS company is based on member subscriptions rather than large scale infrequent invoicing, or multiple small card transactions. This makes specialist funding an important additional product for the SaaS entrepreneur.
Q: What funding do SaaS companies need?
Software as a Service businesses typically look for funding at the following stages:
- Pre-seed - This is a period where the project begins and the software prototypes are developed. Pre-seed capital is typically self-financed.
- Seed - The time where the dream becomes a reality. The product is launched and marketing is undertaken. Startup financing is sought, including specialist SaaS finance.
- Series A to E - These are expansion periods, often separated into five rounds (labelled A to E). Here, larger-scale specialist lending and investment funding are obtained.
- Bridging Loans and Mezzanine Finance - To prepare the business for stock market floatation, these short term funds are often considered and converted into shares at the next stage.
- Initial Public Offering (IPO) - The final stage where the business is launched on the stock market (for example, the London Stock Exchange). The public are able to buy shares and early investors can sell their valuable shares for profit.
Q: How does specialist SaaS revenue-based funding work?
Revenue-based finance is an system whereby the SaaS company give a percentage of future gross monthly income to the lender. In this way, periods where income is low result in low repayments, while periods with strong revenue will make a larger dent in the remaining total.
Repayments to the lender do not continue indefinitely, but cease when a pre-agreed total is reached, typically between three and five times the initially invested capital.
There is no loss of equity in the business and the flexible nature of the repayments prevent the arrangement from ever becoming a difficult burden.
Q: What can SaaS finance be used for?
The capital provided typically comes with no limitations, meaning it can be used entirely as the business sees fit. Uses tend to include:
- Software development costs
- Equipment and infrastructure
SaaS Finance Help with Clifton Private Finance
Our team of funding experts at Clifton Private Finance are here to help you get your SaaS business off the ground. Contact us today to discuss specialist SaaS funding.